Today the banks are continuing to look better on the charts. The earnings reports have been good for some and poor for others, but nothing substantially below expectations. It is the actual vs. expectations that drives the market, not the absolute performance.

Following my charts, I see that all of the worst banks are now showing a positive breakout. UYG (double of the XLF index) made the buy signal a couple days ago. And now I see that FRE, FNM and WM are also showing a positive breakout. C and BAC made their breakout on Monday afternoon. Because they went down so far the past eight weeks, the banks can bounce quite a bit before they hit resistance levels from mid-May. For example, the first point of resistance on UYG is around 26. If it breakes through that, which should be easy enough, it will face significant resistance around 35 where it was through late April into mid-May.

But I am using a August 25 Strike sold put to capture the first leg of this move, with UYG at 21. It had a $4.20 premium on Monday. Now that is down to $3.20 as of the close yesterday and showing an even lower open today. So, already, I have captured more than 25% of the premium available. On 20 contracts, that is over $2000. This is a bolder play than normal, for me, but I feel strongly about the bounce in banks, though am suspicious of another leg down. So, I will be out of the banks by the time UYG gets to 26. I had a scare on Tuesday morning when the banks cratered at the open on bad earnings from Amex and Wachovia and UYG dropped to 19.13. Options on a levered index make for an exciting ride!

Related posts:

1. Buy UYG – Financials have made a turn
2. Is Fannie / Freddie Takeover the Last Shoe?
3. Another Opinion on the Rotation from Commodities to Financial (soft) Equities
4. Watching the Indexes for Direction
5. Is this Market Wreck an Attack by Al Queda?